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Aave’s New Credit Delegation Feature Enables No-Collateral Loans

Aave, the leading open-source and non-custodial protocol, has recently launched a new feature called Credit Delegation allowing users to provide peer-to-peer loans with no formal collateral requirements.

Stani Kulechov, the CEO of Aave Protocol, explained on how the system will work:

@AaveAave is starting native Credit Delegation (CD). Aave depositors can delegate their credit lines. For example, Karen deposits an asset such as USDT to @AaveAave and delegates her credit line to Chad, who draws funds such as ETH from Aave Protocol. — stani.eth Credit Delegation is so hot right now 👻 (@StaniKulechov) July 7, 2020

The new feature relies on peers to enter into agreements between each other allowing borrowers to use the lender’s credit line freely.

However, the two parties must enter into a formal legal agreement that would define terms such as repayment schedule, interest and other necessary conditions.

Through integrating with OpenLaw, a project to create legal contracts recorded on a blockchain, these terms can be formalized on-chain.

The use of peer-to-peer intermediaries allows to circumvent limitations inherent to DeFi, where the protocol cannot recover a borrower’s loan outside of the blockchain.

Usually, all lending platforms require posting more collateral than what is borrowed, heavily limiting the possible use cases of blockchain lending.

The intermediary then takes ownership of the risk of insolvency for the borrower, as the protocol can access their collateral. It is then up to the intermediary to recover the loan through other means.

The intermediary receives a higher interest rate from the borrower, given the higher risk.

The uncollateralized loan model could certainly help bring DeFi into the mainstream as it makes loans more flexible.

Kulechov said that the initial purpose of the system is to:

“simplify the matching for Credit Delegators with borrowers that are both either institutions or businesses.”

However, the limitation appears to be coming from OpenLaw, which is currently only usable by businesses. Kulechov do assures that if the idea were to be proven, it would be expanded to a larger audience.

Aave Protocol would in this case become the:

“Lending liquidity backbone for any finance to source liquidity.”

Kulechov noted that currently DeFi as a whole remains too small and “the industry would need to scale quite a lot” to bring it into the mainstream.

Meanwhile Kulechov also argued that “it’s important that borrowers are able to convert stablecoins into FIAT with less fees.”

Aave Protocol can be considered as one of the first initiatives to bring DeFi to non-crypto use cases, following initial proposals from Maker to onboard music royalty rights as a form of collateral.

Source: Cointelegraph | Image: Unsplash



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